The New Zealand High Court has issued a landmark ruling in the liquidation proceedings of Cryptopia Limited (Cryptopia).  In Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728 (Ruscoe), the court held that the cryptocurrencies in question constitute property and were held on trust.

Background Facts

Cryptopia was a cryptocurrency exchange founded in 2014 that enabled account holders to trade cryptocurrencies.  It maintained a database listing the account holders and their digital assets held on the exchange in the form of digital wallets, which were protected by encryption and only accessible to Cryptopia.  However, Cryptopia’s servers were hacked and the company lost approximately NZ$30 million of cryptocurrency from account holder wallets.  Cryptopia was placed into liquidation in May 2019.  The dispute in Ruscoe was a contest between the account holders and the creditors as to whom was entitled to the distribution of the remaining assets of the business.

In connection with their categorisation and distribution of assets in the liquidation, the liquidators applied to the court for directions on whether cryptocurrencies held by Cryptopia:

1. are considered “property” under New Zealand laws; and
2. were held on trust.

The Property Issue

The New Zealand court cited, among others, the following definitions of “property” in analysing the property issue:

• section 2 of the New Zealand’s Companies Act 1993 (NZCA): “property of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise”.
• the classic definition of property in the English case of National Provincial Bank Ltd v Ainsworth (Ainsworth): “[b]efore a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”.

The court reached the conclusion that the cryptocurrencies situated in Cryptopia’s exchange were property within the definition under section 2 of the NZCA and “also probably more generally”, which suggests similar application in common law based on the Ainsworth definition.  The court relied on a previously decided New Zealand case that “property” under section 2 of the NZCA was wide enough to cover money, which is tangible and personal property in terms of the definition.

Importantly, the court was satisfied that the characteristics of “property” under the Ainsworth definition applied to the cryptocurrencies at issue as they:

• were identifiable subject matter;
• were identifiable by third parties;
• were capable of assumption by third parties; and
• had some degree of permanence or stability.

The Trust Issue

Contrary to the decision in Quoine Pte Ltd v B2C2 Ltd (Quoine), the New Zealand High Court found that the cryptocurrencies at issue were held on trust.  However, this will depend on the facts of each case.

In Quoine, the Singapore Court of Appeal concluded that the tokens were not held on trust as there was no certainty of intention to create a trust and the mere fact that assets were segregated from its customers’ could not conclusively mean that a trust was created.

The New Zealand High Court held that the three elements required to give rise to a trust were met—namely, certainty to create a trust, certainty of subject matter and certainty of objects—and the following factors differentiated Quoine, pointing to Cryptopia being a trustee for its customers’ cryptocurrency:

• express trust provisions were included in Cryptopia’s terms and conditions; and
• Cryptopia’s internal financial accounts and GST returns demonstrated that it did not assert any ownership in the cryptocurrency beyond its beneficial interest in its own personal cryptocurrency as an accountholder.

Key Takeaway

The recent developments suggest that there is a growing acceptance and recognition of cryptocurrencies as property.  In addition to Quoine, the New Zealand High Court’s decision shows how traditional legal principles may apply to cryptocurrencies, and one may envisage similar international applications of crypto-related issues.

Disclaimer: This article is for general information only and does not constitute legal advice.

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